Gasoline Traders Get Paid to Take a Spin on Colonial’s Pipeline

  • New York prices lower than Houston, easing demand for shipping
  • Long-term customers pay subleasers to hold space for future

With the U.S. Northeast drowning in a gasoline glut, companies have resorted to paying others to use their space on the Colonial Pipeline.

Colonial requires customers to move product to maintain their shipping rights on the nation’s largest refined products line, which carries gasoline from Gulf Coast refineries to the New York area. New York fuel prices have dropped below Houston’s thanks to the glut, so shippers using the line can either pay to send gasoline where it will sell for less or pay a subleaser to do it for them.

"It’s like letting someone use your Discover card so that you can get the points on it," said Ernie Barsamian, a principal at the Tank Tiger, a tank-storage broker from Princeton, New Jersey.

Shipping demand on the East Coast’s main artery for fuel supplies has outpaced Colonial’s pipeline capacity since 2012, the company said in March at a Federal Energy Regulatory Commission conference in Washington. When it’s profitable to move gasoline to New York from Houston, companies that don’t have a history of moving barrels on the line pay a premium to sublease space from more dominant users like Marathon Petroleum Corp. or Noble Group Ltd.

To read story from March 9 on why shippers seek expansion of Colonial, click here

“If you’re long barrels in the Gulf Coast, and you need an access point and you don’t have a waterborne alternative, then you’re going to want to move the barrels on Colonial,” Barsamian said. “But you may not have the shipper history to do that.”

Colonial attempted to squelch the ability to sublease in November by changing the rules to disallow such transfers, but FERC struck down that proposal on July 1. Marathon and other users of the line have asked FERC to reconsider, saying the current system for allocating shipments is unreliable. Colonial has separately appealed the decision.

But as the glut persists in the Northeast, Colonial space holders are paying as much as 7.375 cents a gallon to find a subleaser, the lowest level on record, according to Argus Media Ltd. data compiled by Bloomberg. That’s about $77,000 for a typical 25,000-barrel shipment.

Even though demand to ship has waned, the line remains in allocation, meaning there’s less capacity than demand, Steve Baker, company spokesman, said by e-mail.

That’s not likely to change soon, Robert Campbell, head of refined products research at Energy Aspects Ltd, said by e-mail from New York.

“Colonial space is so valuable anyone who holds it will not want to lose their allocation,” he said. “So they will pay for someone to use it if necessary.”

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